How to protect your lifetime savings and pension investment in times of crisis
It’s reasonable to be worried about your investments during times of economic crises. Financial services and policies have significantly altered due to the ongoing credit crunch which arose more than a year ago. Over the past year, banks, investment firms, multi-national companies have been experiencing slumps and losses while others have gone bankrupt. To protect your long-term investments and life savings against the credit crunch, you have to take action, fast! One of the most important investments you want to protect is your retirement pension. In the past year, you have undoubtedly experienced some damage to your pension investment. Unless your pension is protected by your employer through a gold-plated final salary scheme, it is likely to that your pension has fallen in value recently. This could directly affect the level of income that you can enjoy during your retirement. There are various alternatives you can consider to protect your investment. You can decide to change your investment strategies, defer your retirement, or stick with you original plans. Regardless of what you decide to do, you will need to review your retirement plans and consider how you will react to the current crisis. Depending on your situation—whether you are approaching retirement, already retired, only beginning to consider a pension fund, or are still a long way from retirement—there are different options available to you.
Preparing your state of mind
The first thing that you have to do is to face up to the situation and admit to yourself that there is indeed a crisis. Being in denial will only worsen the situation. You have to assess reality as soon as possible to be able to work on the best pension strategy with a sober state of mind. The first natural reaction, of course, is to panic. But never make decisions while you are in a panic mode. Chances are you will make rash and unreasonable decisions that you will regret later on. Go beyond panic and analyze the situation with a rational mind. Assess the crisis as honestly as you can. Get informed about current events, absorbing the good, the bad and the ugly. At all times, try to remain as objective as you can as if you were observing from a third-party perspective and are not directly affected by the crisis.
Assessing the crisis
With the volatility and unpredictability of the financial market, investors and savers are getting worried about which institutions they can rely on to protect their life savings. Even those deemed to be relatively safe and low-risk such as bond investments and corporate bonds are collapsing and are being hit with double digit losses. Established banks such as the Halifax Bank of Scotland are down 90% in share price. Typical pension investment funds such as Balanced Managed fund which include a combination of bonds, shares, property, and cash have fallen by more than 25% over the past year.
Starting out
If you are only about to start a pension, the first thing you need to do is to start saving as soon as possible. If your employer offers a company pension, grab the opportunity. If not, you can start your personal pension fund and contribute to it regularly. In the UK, nearly half of the adult population does not save in a pension and thus jeopardize their retirement. This is unfortunate since pensions are a great opportunity to invest for the future in a tax efficient manner. The government provides incentives for you to save money in a pension. If you are a lower rate tax payer, the government will top every £80 you save with up to £1. If you are a higher rate tax payer, the government tops every £60 you save in a pension with £40. Contributing regularly in a pension will also benefit you even when stock markets are falling. This is because when stocks are down, you are buying at a cheaper price and therefore your pension payments will work harder for you than when markets are high. In this way, you will get more for your money once the stocks rise. Saving for a pension fund while you’re young also allows you to take bigger risks. The earlier you start, the better off you will be upon retirement. A good rule of thumb is to put away at least 15% of your income for your private pension, including your employer’s contributions, assuming that the annual pension fund growth is at 7%. This should be done every year for 40 years so that you can retire with just 50% of final salary. If you want to retire with 2/3 of your salary, you will have to put away 20% every year for forty years.
Long way from retirement
If you’re long way or at least 10 years away from retirement, you can more or less sail through or ride out the volatility of the market. Experts say that you can enjoy higher long-term returns that equities provide and not be too worried about short-term losses. However, you have to be aware that past performance will not necessarily dictate future returns. According to the 2008 Barclays Capital Equity-Gilt Study, equities over the past 50 years have produced 7.2% annual real returns, 2.4% for government bonds and only 2% for cash. If your retirement is a long way off, you should have a suitably diversified portfolio with an equity bias so that you can boost the growth potential of your pension plan. Historically speaking, it is still safer to invest in equities than to keep your savings in cash because returns on investments from cash are unlikely to be able to keep pace with inflation. Investing in property and valuables that increase in value in proportion to inflation are a lot wiser than putting all your cash savings in a bank and relying on interest rates. As a lot of retirees are experiencing, their cash investments are not enough to sail them through crises such as the one being experienced now.
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